Business Context and Reporting Period
Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and Twelve Months Ended March 31, 2004
Business Overview: Middlesex operates as a regulated water utility in New Jersey and Delaware, providing water and wastewater services to residential, commercial, and industrial customers. It also operates non-regulated contract services for municipal and private systems. The company is subject to rate regulation by the New Jersey Board of Public Utilities (BPU) and the Delaware Public Service Commission (PSC).
Key Financial Metrics
| Metric | Q1 2004 | Q1 2003 | TTM 2004 | TTM 2003 |
|---|---|---|---|---|
| Operating Revenues | $15.88 million | $14.98 million | $65.01 million | $62.68 million |
| Operating Income | $2.22 million | $2.38 million | $11.34 million | $12.33 million |
| Net Income | $1.03 million | $1.22 million | $6.44 million | $7.71 million |
| Earnings Per Share (Basic) | $0.09 | $0.11 | $0.59 | $0.72 |
| Operating Cash Flow | $2.94 million | $5.20 million | $11.98 million | $11.16 million |
| Capital Expenditures | $2.94 million | $3.80 million | $18.71 million | $16.48 million |
| Total Debt (Long-term + Current) | $99.32 million | $98.44 million | $99.32 million | $98.44 million |
| Cash and Equivalents | $3.30 million | $3.01 million | $3.30 million | $3.01 million |
Note: TTM = Twelve Months Ended March 31. Debt figures include current portion of long-term debt.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 6.0% in Q1 2004 and 3.7% on a TTM basis. Growth was driven by a 10.8% increase in Delaware customers, new meter services ventures, and the full effect of a 2003 Delaware rate increase. This was partially offset by cool, wet weather reducing consumption in New Jersey and Delaware.
- Expense Increases: Operating expenses rose 8.3% in Q1 and 6.6% TTM. Drivers included higher employee costs due to Delaware growth, increased purchased water and power costs (due to deregulation and contract changes), and higher corporate governance fees.
- Profitability Decline: Net income decreased 15.6% in Q1 and 16.5% TTM. Earnings per share declined due to lower net income and an increase in the weighted average number of common shares outstanding.
- Depreciation: Depreciation expense increased 12.2% in Q1 and 11.5% TTM, reflecting significant utility plant investments in Delaware since March 2003.
Guidance, Outlook, and Risks
Rate Matters and Outlook
- New Jersey: The company has three pending rate increase petitions totaling $8.3 million. Discovery is complete for the Middlesex case, with settlement discussions ongoing. Pinelands cases are in discovery with hearings scheduled for June 2004.
- Delaware: Subsidiary Tidewater filed for a 24% base rate increase on April 26, 2004, requesting a phased implementation starting with a 13% interim increase in late June 2004. Approval is not guaranteed.
- Capital Program: The 2004 capital program is estimated at $28.7 million, focusing on Delaware system additions, a new raw water line in New Jersey, and the RENEW Program for main rehabilitation. Future capital needs for 2005-2006 are projected at $38.5 million.
Liquidity and Financing
- The company funded 100% of Q1 utility plant expenditures from operating cash flow.
- Short-term borrowings of $13.5 million were outstanding against $25.0 million in available lines of credit as of March 31, 2004.
- A common stock offering of 700,000 shares was priced at $19.80 and sold on May 6, 2004, with proceeds intended to repay short-term borrowings.
Risks and Contingencies
- Litigation: A 1998 lawsuit regarding a water line and power cable break is in binding arbitration with a maximum exposure of $0.3 million. A separate construction dispute has a maximum estimated exposure of $4.3 million; management believes any liability will be significantly less than the maximum and recoverable through rates.
- Regulatory Risk: Future earnings depend on the approval and timing of rate increases. Delays or denials could adversely affect liquidity and results of operations.
- Weather: Consumption and revenues are sensitive to weather conditions, particularly in the first quarter.
Investor Verification Checklist
- Rate Case Outcomes: Monitor the status of the $8.3 million New Jersey rate petitions and the 24% Delaware rate increase filed in April 2004.
- Stock Offering Proceeds: Verify the closing of the May 2004 common stock offering and the subsequent reduction in short-term debt.
- Litigation Exposure: Track the resolution of the construction subcontractor dispute with a potential $4.3 million exposure.
- Capital Expenditure Execution: Confirm progress on the $28.7 million 2004 capital program, specifically the Delaware expansions and New Jersey RENEW Program.
- Cost Inflation: Watch for the impact of the anticipated 3.34% increase in purchased water costs effective in Q2 2004.