Business Context and Reporting Period
Company: Middlesex Water Company (MSEX)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Middlesex Water Company owns and operates regulated water utility and wastewater systems in New Jersey, Delaware, and Pennsylvania. The company also operates systems under contract for municipal and private clients. Operations are divided into two segments: Regulated (approximately 90% of revenue) and Non-Regulated (contract services). The company serves approximately 96,000 retail customers across its systems.
Key Financial Metrics
| Metric (in thousands) | 2010 | 2009 |
|---|---|---|
| Operating Revenues | $102,735 | $91,243 |
| Operating Income | $26,597 | $20,161 |
| Net Income | $14,330 | $9,977 |
| Earnings Per Share (Basic) | $0.96 | $0.73 |
| Operating Margin | 25.9% | 22.1% |
| Net Cash from Operating Activities | $25,565 | $18,506 |
| Total Assets | $489,185 | $458,086 |
| Long-term Debt | $133,844 | $124,910 |
| Short-term Debt (Notes Payable) | $17,000 | $42,850 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased by $11.5 million (12.6%) compared to 2009. This was driven primarily by a 13.57% base rate increase approved for the Middlesex System in March 2010 ($7.8 million impact) and favorable weather conditions (hot, dry summer) which increased water consumption.
- Profitability: Net income increased by $4.3 million (43.6%) to $14.3 million. Operating income rose by $6.4 million. The increase in earnings per share was partially offset by an increase in the average number of shares outstanding following a public offering in June 2010.
- Expense Increases: Operations and maintenance expenses increased by $3.2 million, attributed to higher material costs due to water main breaks, increased purchased water costs, and higher labor costs (overtime and rates). Other taxes increased by $1.2 million due to higher taxable revenues.
- Capital Structure: The company issued 1.9 million shares of common stock in June 2010, raising net proceeds of approximately $27.8 million, which were used to repay short-term debt. Consequently, short-term debt decreased significantly from $42.9 million in 2009 to $17.0 million in 2010.
Guidance, Outlook, and Risks
- Rate Outlook: Middlesex and several subsidiaries are expected to file for rate increases in 2011. In January 2011, Middlesex filed for a Purchased Water Adjustment Clause (PWAC) to recover $0.4 million in increased costs. There is no assurance that commissions will approve these requests in full or on a timely basis.
- Capital Expenditures: The company expects to spend approximately $66.0 million on capital projects through 2013. For 2011, estimated expenditures are $22.9 million, funded by internal cash flow, State Revolving Fund (SRF) loans, and short-term borrowings.
- Weather and Economic Risks: Revenues are sensitive to weather patterns; cooler or wetter summers could reduce demand. Ongoing economic conditions continue to negatively impact commercial and industrial water consumption and the pace of residential construction, which affects growth and the recoverability of Preliminary Survey & Investigation (PS&I) costs.
- Regulatory Risks: The company is subject to strict regulation by the NJBPU, DEPSC, and PAPUC regarding rates, services, and environmental compliance. Failure to obtain rate relief or comply with new environmental standards could adversely affect earnings.
Investor Verification Checklist
- Rate Case Approvals: Verify the status and outcome of the 2011 rate increase filings, particularly the Middlesex PWAC and Tidewater DSIC adjustments.
- Weather Sensitivity: Monitor weather forecasts for the upcoming summer season, as deviations from the hot/dry 2010 pattern could materially impact revenue.
- Commercial Demand: Assess the recovery trajectory of commercial and industrial water usage in the Middlesex System, which has been depressed by economic conditions.
- Capital Funding: Confirm the availability of SRF loans and the cost of capital for the $66 million capital program planned through 2013.
- Debt Covenants: Review compliance with mortgage covenants, specifically debt service and capital ratio requirements, given the company's significant long-term debt load.