================================================================================ 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 the quarter ended September 30, 1998 No.0-422 ------------------ -------- MIDDLESEX WATER COMPANY (Exact name of registrant as specified in its charter) New Jersey 22-1114430 ---------- ---------- State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1500 Ronson Road, Iselin, New Jersey 08830-3020 - ------------------------------------ ---------- (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) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at September 30, 1998 ----- --------------------------------- Common Stock, No par Value 4,368,897 - -------------------------- ================================================================================
MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Operating Revenues $12,073,985 $10,968,031 $32,434,440 $30,241,199 ----------- ----------- ----------- ----------- Operating Expenses: Operations and Maintenance 5,703,460 4,984,799 15,791,226 14,510,277 Depreciation 823,148 750,761 2,446,871 2,265,872 Taxes, other than Income Taxes 1,666,111 1,556,779 4,580,355 4,377,776 Federal Income Taxes 903,758 1,035,095 2,422,447 2,390,122 ----------- ----------- ----------- ----------- Total Operating Expenses 9,096,477 8,327,434 25,240,899 23,544,047 ----------- ----------- ----------- ----------- Utility Operating Income 2,977,508 2,640,597 7,193,541 6,697,152 Other Income-Net 460,637 71,527 983,058 251,549 ----------- ----------- ----------- ----------- Income Before Interest Charges 3,438,145 2,712,124 8,176,599 6,948,701 Interest Charges 1,090,573 818,181 2,991,768 2,461,913 ----------- ----------- ----------- ----------- Net Income 2,347,572 1,893,943 5,184,831 4,486,788 Preferred Stock Dividend Requirements 79,697 66,398 239,090 145,861 ----------- ----------- ----------- ----------- Earnings Applicable to Common Stock $ 2,267,875 $ 1,827,545 $ 4,945,741 $ 4,340,927 =========== =========== =========== =========== Earnings per share of Common Stock: Basic $ 0.52 $ 0.43 $ 1.14 $ 1.03 Diluted $ 0.51 $ 0.43 $ 1.13 $ 1.02 Average Number of Common Shares Outstanding: Basic 4,357,571 4,243,478 4,326,337 4,226,241 Diluted 4,583,997 4,425,304 4,552,763 4,346,792 Cash Dividends Paid per Common Share $0.28 1/2 $0.28 $0.85 1/2 $0.84 </TABLE> See Notes to Consolidated Financial Statements. -1-
MIDDLESEX WATER COMPANY CONSOLIDATED BALANCE SHEETS ASSETS AND OTHER DEBITS September 30, December 31, 1998 1997 ------------ ------------ (Unaudited) UTILITY PLANT: Water Production $ 28,055,246 $ 27,689,254 Transmission and Distribution 115,437,754 113,104,789 General 18,991,442 18,845,301 Construction Work in Progress 21,331,320 5,683,217 ------------ ------------ TOTAL 183,815,762 165,322,561 Less Accumulated Depreciation 31,771,030 30,251,825 ------------ ------------ UTILITY PLANT-NET 152,044,732 135,070,736 ------------ ------------ NONUTILITY ASSETS-NET 3,730,571 2,038,568 ------------ ------------ CURRENT ASSETS: Cash and Cash Equivalents 1,675,405 2,513,294 Temporary Cash Investments-Restricted 11,496,575 218,787 Accounts Receivable (net of allowance for doubtful accounts) 5,165,277 3,794,860 Unbilled Revenues 2,595,479 2,175,934 Materials and Supplies (at average cost) 1,151,314 960,577 Prepayments and Other Current Assets 571,540 387,487 ------------ ------------ TOTAL CURRENT ASSETS 22,655,590 10,050,939 ------------ ------------ DEFERRED CHARGES: Regulatory Assets 7,260,065 7,359,969 Unamortized Debt Expense 3,149,262 2,773,233 Preliminary Survey and Investigation Charges 250,344 213,650 Other 2,323,936 2,253,678 ------------ ------------ TOTAL DEFERRED CHARGES 12,983,607 12,600,530 ------------ ------------ TOTAL $191,414,500 $159,760,773 ============ ============ See Notes to Consolidated Financial Statements -2-
MIDDLESEX WATER COMPANY CONSOLIDATED BALANCE SHEETS LIABILITIES AND OTHER CREDITS September 30, December 31, 1998 1997 ------------ ------------ (Unaudited) CAPITALIZATION (see accompanying statements) $135,209,317 $109,139,429 ------------ ------------ CURRENT LIABILITIES: Current Portion of Long-term Debt 45,341 42,708 Notes Payable 4,500,000 564,701 Accounts Payable 4,365,465 3,602,420 Customer Deposits 406,451 393,376 Taxes Accrued 5,550,901 5,142,089 Interest Accrued 694,880 1,183,561 Other 2,173,228 2,039,828 ------------ ------------ TOTAL CURRENT LIABILITIES 17,736,266 12,968,683 ------------ ------------ DEFERRED CREDITS: Customer Advances for Construction 11,152,914 10,830,646 Accumulated Deferred Investment Tax Credits 2,183,303 2,237,060 Accumulated Deferred Federal Income Taxes 12,378,560 12,177,993 Other 2,361,273 2,051,895 ------------ ------------ TOTAL DEFERRED CREDITS 28,076,050 27,297,594 ------------ ------------ CONTRIBUTIONS IN AID OF CONSTRUCTION 10,392,867 10,355,067 ------------ ------------ TOTAL $191,414,500 $159,760,773 ============ ============ See Notes to Consolidated Financial Statements. -3-
MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION AND RETAINED EARNINGS <TABLE> <CAPTION> September 30, December 31, 1998 1997 ------------- ------------- (Unaudited) <S> <C> <C> CAPITALIZATION: Common Stock, No Par Value Shares Authorized, 10,000,000 Shares Outstanding - 1998 - 4,368,897; 1997 - 4,269,217 $ 32,994,426 $ 31,138,484 Retained Earnings 21,335,315 20,087,065 ------------- ------------- TOTAL COMMON EQUITY 54,329,741 51,225,549 ------------- ------------- Cumulative Preference Stock, No Par Value Shares Authorized, 100,000; Shares Outstanding, None Cumulative Preferred Stock, No Par Value, Shares Authorized - 149,980 Convertible: Shares Outstanding, $7.00 Series - 14,881 1,562,505 1,562,505 Shares Outstanding, $8.00 Series - 20,000 2,331,430 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 4,995,635 4,995,635 ------------- ------------- Long-term Debt: 8.02% Amortizing Secured Note, due December 20, 2021 3,429,282 3,460,953 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 -- ------------- ------------- SUBTOTAL LONG-TERM DEBT 75,929,282 52,960,953 ------------- ------------- Less: Current Portion of Long-term Debt (45,341) (42,708) ------------- ------------- TOTAL LONG-TERM DEBT 75,883,941 52,918,245 ------------- ------------- TOTAL CAPITALIZATION $ 135,209,317 $ 109,139,429 ============= ============= </TABLE> <TABLE> <CAPTION> Nine Months Ended Year Ended September 30, December 31, 1998 1997 ------------- ------------- (Unaudited) <S> <C> <C> RETAINED EARNINGS: BALANCE AT BEGINNING OF PERIOD $ 20,087,065 $ 19,226,847 Net Income 5,184,831 5,860,906 ------------- ------------- TOTAL 25,271,896 25,087,753 ------------- ------------- Cash Dividends: Cumulative Preferred Stock 239,054 239,361 Common Stock 3,697,527 4,761,327 ------------- ------------- TOTAL DEDUCTIONS 3,936,581 5,000,688 ------------- ------------- BALANCE AT END OF PERIOD $ 21,335,315 $ 20,087,065 ============= ============= </TABLE> See Notes to Consolidated Financial Statements. -4-
MIDDLESEX WATER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 ------------ ------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 5,184,831 $ 4,486,788 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 2,803,102 2,321,104 Provision for Deferred Income Taxes 200,567 570,310 Allowance for Funds Used During Construction (653,156) (63,637) Changes in Current Assets and Liabilities: Accounts Receivable (1,370,417) (308,882) Materials and Supplies (190,737) (33,844) Accounts Payable 763,045 313,273 Accrued Income Taxes 408,812 716,549 Accrued Interest (488,681) (712,121) Unbilled Revenues (419,545) (294,187) Other-Net 89,015 (273,798) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 6,326,836 6,721,555 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Utility Plant Expenditures* (18,764,047) (7,257,652) Cash from Acquisition of Subsidiary -- 158,436 Note Receivable (1,644,308) -- Preliminary Survey and Investigation Charges (36,694) 1,523,479 Other-Net (150,849) (87,781) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (20,595,898) (5,663,518) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of Long-term Debt (31,671) (28,955) Proceeds from Issuance of Long-term Debt 23,000,000 -- Short-term Bank Borrowings-Net 3,935,299 -- Deferred Debt Issuance Expenses (474,096) -- Temporary Cash Investments-Restricted (11,277,788) 10,125 Proceeds from Issuance of Common Stock-Net 1,855,942 844,197 Payment of Preferred Dividends (239,054) (159,628) Payment of Common Dividends (3,697,527) (3,547,732) Customer Advances and Contributions-Net 360,068 793,159 ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 13,431,173 (2,088,834) ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS (837,889) (1,030,797) ------------ ------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,513,294 4,262,862 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,675,405 $ 3,232,065 ============ ============ * Excludes Allowance for Funds Used During Construction SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash Paid During the Period for: Interest (net of amounts capitalized) $ 3,052,732 $ 3,038,530 Income Taxes $ 2,206,125 $ 1,102,200 </TABLE> See Notes to Consolidated Financial Statements. -5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies Organization - Middlesex Water Company (Middlesex or Company) is the parent company and sole shareholder of Tidewater Utilities, Inc. (Tidewater), Pinelands Water Company, Pinelands Wastewater Company and Utility Service Affiliates, Inc. (USA). 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 (Consolidated Group) are reported on a consolidated basis. All intercompany accounts and transactions have been eliminated. The consolidated notes accompanying the 1997 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, 1998 and the results of operations and its cash flows for the periods ended September 30, 1998 and 1997. Information included in the Balance Sheet as of December 31, 1997 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, 1997. Note 2 - Regulatory Matters On September 17, 1998, Middlesex filed a petition with the New Jersey Board of Public Utilities (BPU) for a base rate increase of $7.9 million or 2 1.9%. Approximately 75% of the increase is necessary to recover the investment in the upgrade and expansion of the Carl J. Olsen Water Treatment Plant (CJO Plant) serving our Central New Jersey water system. The purpose of the CJO Plant upgrade is to meet the new and anticipated regulatory standards concerning water quality, as well as to increase the plant's production capacity. A decision by the BPU is expected in the summer of 1999. In January 1998, Middlesex received approval from the BPU for an overall rate increase of 4.4% or a $1.5 million based on an original petition tiled in November 1996. Note 3 - Capitalization Common Stock - On September 9, 1998, Middlesex filed a petition with the BPU seeking approval to issue up to 525,000 shares of its no par common stock through a public offering. A decision is expected in November 1998. A registration statement on Form S-3 is expected to be filed on or about the same date as the Form 10-Q for the quarter ended September 30, 1998. During the three months ended September 30, 1998, 23,652 common shares (0.3 million) were issued under the Company's Restricted Stock Plan and the Dividend Reinvestment and Common Stock Purchase Plan. Long-term Debt In November 1998, the Company will close on a BPU approved $2.2 million, 20 year loan from the State of New Jersey and the New Jersey Environmental Infrastructure Trust (Trust). The proceeds will he used to fund the 1999 capital project to clean and cement line previously unlined pipes and mains. The State loan of $l.05 million will come from the New Jersey Department of Environmental Protection, which is funded under a Federal grant program to finance projects that improve water quality. This portion of the loan is interest free.
The Trust loan of $1.15 million will carry a coupon interest rate that averages approximately 4.50%. The weighted rate for this combination of loans will be about 2.35%. The Company has delivered in escrow two Mortgage Bonds to evidence these loans. Note 4-- Commitments The Company has formed a new subsidiary, Utility Service Affiliates (Perth Amboy), Inc. (USA-PA), which is negotiating a 20-year agreement with the City of Perth Amboy, New Jersey (Perth Amboy) and the Middlesex County Improvement Authority (MCIA) to operate and maintain the water and wastewater systems of the municipality. Perth Amboy has a population of 40,000 and has approximately 9,500 customers, most of whom are served by both systems. The agreement is being effected under New Jersey's Water Supply Public/Private Contracting Act and the New Jersey Wastewater Public/Private Contracting Act. Under the agreement, USA-PA would receive a fixed fee and a variable fee based on increased system billing. Fixed fee payments begin at $6.4 million in the first year and increase to $9.7 in year 20. The agreement would also require USA-PA to lease from Perth Amboy all of its employees who currently work on the Perth Amboy water and wastewater systems. In connection with the agreement, the MCIA will issue up to $69.5 million in three series of bonds. One of those series of bonds, in principal amount up to $27.5 million, is to be guaranteed by the Company. The other series of bonds are to be guaranteed by Perth Amboy. The agreement and related financing have received the approvals of the BPU and the New Jersey Department of Community Affairs-Local Finance Board. If the agreement goes into effect, USA-PA may enter into a subcontract with a sewer contracting firm for the operation and maintenance of the Perth Amboy wastewater system. This potential contract would result in certain sharing of fixed and variable fees as well as the leased employees. Note 5-- Earnings Per Share Basic earnings per share are computed on the basis of the weighted average number of shares outstanding. Diluted earnings per share assumes the conversion of both the Convertible Preferred Stock $7.00 Series and the Convertible Preferred Stock $8.00 Series. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Basic: Income Shares Income Shares Income Shares Income Shares ------ ------ ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Net Income $ 2,348 4,358 $ 1,894 4,243 $ 5,185 4,326 $ 4,487 4,226 Preferred Stock Dividend Requirements (80) (66) (239) (146) ----------------------------------------- ------------------------------------- Basic Earnings Applicable to Common Stock $ 2,268 4,358 $ 1,828 4,243 $ 4,946 4,326 $ 4,341 4,226 Basic Earnings Per Share of Common Stock $ 0.52 $ 0.43 $ 1.14 $ 1.03 Diluted: Basic Earnings Applicable to Common Stock $ 2,268 4,358 $ 1,828 4,243 $ 4,946 4,326 $ 4,341 4,226 Convertible Preferred Stock 66 226 53 182 198 226 105 121 ----------------------------------------- ------------------------------------- Diluted Earnings Applicable to Common Stock $ 2,334 4,584 $ 1,881 4,425 $ 5,144 4,552 $ 4,446 4,347 Diluted Earnings Per Share of Common Stock $ 0.51 $ 0.43 $ 1.13 $ 1.02 </TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The table below presents the estimated capital expenditures for all our companies for 1998, 1999 and 2000: 1998 1999 2000 ---- ---- ---- CJO Plant $16.0 $17.0 $ -- Delaware Systems 3.2 2.0 0.7 RENEW Program 2.1 2.2 2.2 Scheduled upgrades to existing systems 3.0 4.7 3.6 ----- ----- ---- Total $24.3 $25.9 $6.5 Our plan to finance these projects is well underway. Proceeds from the $23.0 million Series W First Mortgage Bond issued in March 1998 and the anticipated common stock offering will be used to finance the CJO Plant expenditures in 1998 and 1999. Our Middlesex system will receive $2.2 million from New Jersey State Revolving Fund to cover the cost of the 1999 RENEW Program, which is our program to clean and line with cement 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. We expect to apply for similar funds in 1999 for the year 2000 RENEW Program. The financing of our Delaware subsidiaries capital program will be a combination of a capital contribution from Middlesex and long-term debt financing from either a financial institution or Middlesex. The debt financing decision will be based upon the terms of financing available to our Delaware subsidiaries. We anticipate that we may file with the Delaware Public Service Commission during 1999 for a rate increase for Tidewater Utilities, Inc. We expect to be able to cover the costs of scheduled upgrades to the existing systems with the cash flow generated from our utility operations through the year 2000. For the nine months ended, our consolidated group has expended $18.8 million for capital projects, including $12.2 for the CJO Plant. From time to time it may be necessary to utilize the $28.0 million in total lines of credit we have available with three commercial banks for working capital purposes or provide interim funds until long-term financing is arranged. At September 30, 1998, we had $4.5 million of loans outstanding against those lines of credit. Regulatory Matters On September 17, 1998, Middlesex filed a petition with the New Jersey Board of Public Utilities (BPU) for a base rate increase of $7.9 million or 21.9%. Approximately 75% of the increase is
necessary to recover the investment in the upgrade and expansion of the Carl J. Olsen Water Treatment Plant (CJO Plant) serving our Central New Jersey water system. The purpose of the CJO Plant upgrade is to meet the new and anticipated regulatory standards concerning water quality, as well as to increase the plant's production capacity. A decision by the BPU is expected in the summer of 1999. On January 29, 1998, the BPU approved an increase in the rates of Middlesex by 4.4% or $1.5 million. The original petition was filed in November 1996. Under the approval, the allowed return on equity is 11.0% with an overall rate of return of 8.56%. The increase includes the recovery of post-retirement costs other than pension expenses which are mandated by the Company's compliance with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." In January 1997, the BPU approved a stipulation agreed to by the parties to the Pinelands Water and Wastewater Companies' rate cases which were filed in February 1996. The stipulations allow for a combined rate increase which will result in $0.4 million additional revenues. The new rates will be phased in over a three-year period to minimize the impact on customers. Phases one and two were implemented in January 1997 and 1998, respectively. Accounting Standards In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No.128, "Earnings Per Share," (SFAS No.128). This statement supersedes Accounting Principles Bulletin Opinion No.15, "Earnings Per Share," and simplifies the reporting and computing of earnings per share (EPS). SFAS No.128 requires dual presentation of basic and diluted earnings per share on the face of the income statement and requires a reconciliation of the basic EPS computation to the diluted EPS computation. At December 31,1997, the Company adopted SFAS No.128. See Note 5 to the Consolidated Financial Statements. Statement of Financial Accounting Standards (SFAS) No.130, "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. At September 30, 1998, the Company does not have any items of comprehensive income that would affect the current reporting of the Company's financial position, results of operations or cash flows. SFAS No.131, "Disclosures about Segments of an Enterprise and Related Information," requires that public enterprises report certain information about operating segments in complete sets of financial statements. Disclosure is not required for interim financial statements in the initial year of its application. The Company is evaluating the requirements of SFAS No.131. Because the statement relates solely to disclosure provisions, it will not have any effect on the Company's financial position, results of operations or cash flows. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," revises and standardizes disclosure requirements for pension and other post-retirement benefit
plans but does not change the measurement or recognition of those plans. This Statement is required to be adopted for the fiscal year ending December 31, 1998. Year 2000 Software used in many computer systems and computerized control devices was designed to record only the last two digits of each year. This software, some of which the Company owns, may not function properly as of January 1, 2000 because it interprets the new year as 1900. The Company has evaluated its own computer systems to make certain that those systems work properly when 1999 becomes 2000. The Company has also requested certification of Year 2000 compliance from the principal vendors of data processing serving its financial reporting, payroll, billing, customer information and shareholder record systems and the vendor installing the new Supervisory Control and Data Acquisition system (SCADA). The vendors have certified that their systems have been tested and will work properly. The Company believes it may reasonably rely on those certifications. The Company also expects to spend up to $10,000 to bring other operating systems including its network of desktop personal computers, into Year 2000 compliance. Nonetheless, the Company may not have identified every computerized control device of the Company's which may be affected by the Year 2000. Even if identified, the Company may not be able to reprogram or replace those devices before January 1, 2000. More importantly, the Company cannot assess the impact on the Company of failures of computer systems and control devices used by others. The Company is especially concerned about third parties who provide significant services and materials to process, treat and distribute water and to process, treat and dispose of wastewater, and about the possible failure of electric power and telecommunications or the inability' to obtain diesel fuel for the Company's stand-by generators. The occurrence of any such Year 2000-related problem could have a material adverse effect on the Company's financial condition and results of operations. 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, objectives, 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. Results of Operations - Nine Months Ended September 30, 1998 Operating Revenues for the nine months ended September 30, 1998 were $2.2 million higher than last year. Rate increases resulted in additional revenues of $1.2 million. The Middlesex System received regulatory approval from the New Jersey Board of Public Utilities (BPU) to implement a 4.4% rate increase in January 1998. The Pinelands Water and Wastewater Companies also increased their rates in January 1998. This increase represented the second part of a three part rate increase previously approved by the BPU. The third increase is scheduled for January 1999. A subsidiary acquisition added $0.6 million to revenues. The acquisition of Public Water
Supply Company, Inc. (Public) by our wholly-owned subsidiary, Tidewater Utilities, Inc. (Tidewater) was completed on July 31, 1997. As a result, the nine months of consolidated revenue for 1997 only include two months of revenue from Public. Customer growth contributed $0.4 million to revenues. The customer base of Tidewater grew by 820 accounts over the twelve month period ended September 30, 1998. This translates to an annual growth rate of 11.6% and is consistent with the increase of 13.0% in water services billed to the customers of Tidewater. Operating Expenses rose $ 1.7 million or 7.2% for the nine months ended September 30, 1998. Some of the reasons for this increase are briefly discussed here. The Middlesex System changed the composition of the water sources it used to supply its customers. During 1998 less water was withdrawn from its well fields and more was purchased from the New Jersey Water Supply Authority and the Elizabethtown Water Company. This resulted in higher purchased water costs and higher chemicals expense of $0.2 million. Electric power costs for the Middlesex System were higher by about $0.2 million over last year due primarily to a large credit we received in the 1997 period from our power provider. Costs associated with the recognition of post retirement benefits under mandated accounting standards pushed operating expenses up by $0.3 million. With the acquisition of Public, their expenses are now included in our consolidated expenses. Their expenses amounted to $0.3 million for the nine months ended September 30, 1998. On a consolidated basis almost $9.5 million of newly constructed utility plant or utility plant acquired through acquisition was placed in service since September 30, 1997. This resulted in higher depreciation expense in the first nine months of 1998 of $0.2 million or 8% over that period last year. Taxes other than income taxes includes the taxes that the State of New Jersey charges regulated water and wastewater utilities based upon gross receipts of operations in New Jersey. These taxes are called Gross Receipts and Franchise Taxes. In general, for every dollar of revenue collected from our New Jersey customers approximately 13.5% is remitted to the State of New Jersey. As described above, about $1.2 million of additional revenues was recorded by our New Jersey companies which in turn increased the tax expense by just under $0.2 million. Other income increased $0.7 million in the first nine months of 1998 over last year. One of the components of the increase is higher earnings on the unexpended proceeds from the Series W Mortgage Bonds issued in March 1998. As of September 30, 1998, $11.3 million of the $23.0 million received from the Series W offering remains in a CJO Plant Construction account maintained by a trustee. We submit payment requisitions to the trustee for qualified CJO Plant expenditures. It is our expectation that the balance of the proceeds will be exhausted by February 1999. Another piece of the increase pertains to interest capitalized on the CJO Plant work in process expenditures. Public utilities refer to this as Allowance for Funds Used During Construction (AFUDC). In general, AFUDC is recorded as a cost of the project until the utility plant is ready to provide service to customers. The effect is to reduce expenses currently for the Company and depreciate the capitalized interest along with the rest of the CJO Plant costs over its estimated useful life. Interest charges rose $0.5 million which represents our obligation to pay interest on those
Series W Mortgage Bonds. Net Income for the nine months ended September 30, 1998 increased $0.7 million or 15.6% over the comparable 1997 period based upon the discussion above. The increase in the preferred stock dividend requirement is attributable to the issuance of preferred stock in July 1997 to complete the acquisition of Public. Through September 1998 nine months worth of the dividend requirements were recorded while for the same period in 1997 only two months were recorded. Basic and Diluted Earnings per Share both increased by $0.11 over last year. There is a $0.01 per share difference between Basic and Diluted Earnings per Share. This difference is due to the two series of convertible preferred stock that we have issued. Results of Operations - Three Months Ended September 30, 1998 Operating Revenues in the third quarter increased $1.1 million or 10.1% compared to the same period in 1997. Rate increases resulted in additional revenue of $0.5 million. The inclusion of Public in consolidated operations for the third quarter contributed additional revenue of $0.2 million over 1997, Consumption increases for both Middlesex residential customers and a contract customer, as well as growth in Tidewater's customer base, accounted for $0.4 million of the higher revenues. Total Operating Expenses rose $0.8 million or 9.2% for the third quarter. These increases are partially the result of higher operations and maintenance expenses. Purchased water and electric power each rose $0.1 million. Water treatment costs and mandated recognition of accrued post-retirement benefit costs other than pensions also increased $0.1 million each and the inclusion of Public's expenses added $0.2 million. Depreciation for the third quarter increased 9.6%. On a consolidated basis almost $9.5 million of newly constructed utility plant or utility plant acquired through acquisition was placed in service since September 30, 1997. Taxes other than Income Taxes increased $0.1 million due to higher revenue based taxes. Federal Income Taxes decreased $0.1 million for the quarter as a result of a deferred tax benefit related to increased capitalized interest. Other income increased $0.4 million for the quarter over last year. One of the components of the increase is higher earnings on the unexpended proceeds from the Series W Mortgage Bonds. Another piece of the increase pertains to interest capitalized on the CJO Plant work in process expenditures. Interest charges rose $0.3 million which represents our obligation to pay interest on those Series W Mortgage Bonds. Net Income for the three months ended September 30, 1998 increased $0.5 million or 24.0% over the comparable 1997 period based upon the discussion above. The increase in the preferred stock dividend requirement is attributable to the issuance of preferred
stock in July 1997 to complete the acquisition of Public. Only two months worth of the dividend requirements were recorded for the third quarter of 1997. Basic Earnings per Share increased by $0.09 over last year and Diluted Earnings per Share increased by $0.08 over last year. There is a $0.01 per share difference between Basic and Diluted Earnings per Share for the quarter ended September 30, 1998.
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 In Formation None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 11 Statement Regarding Computation of Per Share Earnings 10.21 Copy of Supplemental Indenture dated March 1, 1998 between Middlesex Water Company and First Union National Bank, as Trustee. Copy of Trust Indenture dated March 1, 1998 between the New Jersey Economic Development Authority and PNC Bank, National Association, as Trustee. (Series W First Mortgage Bond) 10.22 Copy of Supplemental Indenture dated October 15, 1998 between Middlesex Water Company and First Union National Bank, as Trustee. Copy of Loan Agreement dated November 1, 1998 between the State of New Jersey and Middlesex Water Company. (Series X First Mortgage Bond) 10.23 Copy of Supplemental Indenture dated October 15, 1998 between Middlesex Water Company and First Union National Bank, as Trustee. Copy of loan Agreement dated November 1, 1998 between the New Jersey Environmental Infrastructure Trust and Middlesex Water Company. (Series Y First Mortgage Bond) 27 Financial Data Schedule. (b) Reports on Form 8-K: Filed September 11, 1998
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) Date: November 2, 1998 /s/ A. Bruce O'Connor ------------------------------ A. Bruce O'Connor Vice President and Controller