MSEX

Business Context and Reporting Period

Company: Middlesex Water Company (MSEX)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Overview: Middlesex Water Company operates regulated water utility systems in central and southern New Jersey and Delaware, as well as a regulated wastewater utility in New Jersey. The company also provides non-regulated contract operations for water and wastewater systems. Key operating segments include the Middlesex System (NJ), Tidewater System (DE), and Utility Service Affiliates (USA/USA-PA).

Key Financial Metrics (Year Ended Dec 31, 2003)

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 3.5% ($2.2 million) compared to 2002. Growth was driven by a 10.9% increase in Delaware customers and higher base rates, partially offset by cool, wet weather which reduced consumption revenue by approximately $0.8 million.
• Profitability Decline: Net income decreased 14.6% to $6.6 million. Operating income fell 7.8% due to a 6.4% increase in operating expenses ($3.1 million). Expense increases were attributed to severe winter weather main breaks, higher employee costs, increased sewer disposal fees, and new non-regulated operations.
• Debt Levels: Long-term debt increased by approximately $9.9 million to $97.4 million to fund capital expenditures.
• Capital Expenditures: Utility plant expenditures totaled $19.6 million in 2003, up from $16.5 million in 2002.

Guidance, Outlook, and Risks

Outlook and Guidance

• 2004 Capital Program: The company projects capital expenditures of $28.7 million for 2004, increasing to $24.4 million in 2005. Major projects include a $10 million raw water line in New Jersey and system improvements in Delaware.
• Rate Filings: Management filed for a 17.8% base rate increase for the Middlesex System and a 19.02% increase for Pinelands with the New Jersey Board of Public Utilities (BPU). A base rate increase for Tidewater (Delaware) is expected to be filed in early spring 2004, projected to exceed 20%.
• Cost Pressures: A new water supply agreement effective January 2004 is expected to increase raw water costs by at least 8.5% annually. Rising electricity costs and insurance premiums are also cited as drivers for rate relief.

Risks and Contingencies

• Regulatory Risk: There is no assurance that requested rate increases will be approved or granted in full amounts. Future earnings depend heavily on regulatory outcomes.
• Weather Sensitivity: Revenues are significantly impacted by weather conditions; cool, wet weather reduces consumption, while droughts can restrict usage.
• Legal Proceedings:
  • Water Line/Electric Cable Break: Settled for binding arbitration with a maximum exposure of $0.3 million.
  • Construction Dispute: Pending litigation with a maximum estimated exposure of $4.3 million. Management believes the actual liability will be significantly less than the maximum.
• Guarantees: The company guarantees approximately $24.4 million of Series C Serial Bonds issued by the City of Perth Amboy.

Investor Verification Checklist

• Rate Case Outcomes: Monitor the status of the 17.8% (Middlesex) and 19.02% (Pinelands) rate increase petitions filed with the NJ BPU, and the upcoming Delaware filing for Tidewater.
• Raw Water Costs: Verify the impact of the new New Jersey Water Supply Authority agreement on operating margins, specifically the projected 8.5% annual cost increase.
• Capital Funding: Confirm the execution of the $28.7 million 2004 capital program and the effectiveness of financing sources (state revolving funds, short-term credit lines, and potential equity offerings).
• Legal Exposure: Track the resolution of the $4.3 million construction dispute and the $0.3 million arbitration case.
• Dividend Sustainability: Review the company's ability to maintain its dividend policy (paid annually since 1912) given the decline in 2003 net income and increased capital requirements.