MSEX

Business Context and Reporting Period

Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Middlesex operates as a regulated water utility in New Jersey, Delaware, and Pennsylvania, providing water and wastewater services to residential, commercial, and industrial customers. The company also operates non-regulated contract services for municipal systems. As of November 3, 2010, there were 15,551,036 shares of common stock outstanding.

Key Financial Metrics

Margins (Nine Months 2010):
- Operating Margin: 27.3% ($21,204 / $77,768)
- Net Profit Margin: 15.1% ($11,720 / $77,768)

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 15.9% for the three months ended Sept 30, 2010, and 12.4% for the nine-month period compared to 2009. This was driven by a 13.57% base water rate increase approved in March 2010 for the Middlesex System and increased customer demand due to hot, dry weather.
• Profitability: Net income rose 42.4% for the quarter and 42.3% for the nine-month period year-over-year. Earnings per share (Basic) increased from $0.30 to $0.37 (quarterly) and $0.60 to $0.81 (nine-month).
• Capital Structure: In June 2010, the company issued 1.9 million shares of common stock, raising approximately $27.8 million in net proceeds. These funds were used to repay short-term debt, reducing outstanding notes payable from $42.9 million at year-end 2009 to $18.8 million at Sept 30, 2010.
• Expenses: Operating expenses increased due to higher labor costs, water main breaks, and the implementation of a company-wide IT platform. Interest charges remained relatively stable as increased long-term debt interest was offset by reduced short-term borrowing.

Guidance, Outlook, and Risks

• Outlook: Management expects revenues to continue increasing for the remainder of 2010 due to the implementation of the Distribution System Improvement Charge (DSIC) in Delaware and the March 2010 rate increase in New Jersey.
• Capital Program: The 2010 capital expenditure program is estimated at $33.4 million. Approximately $22.2 million has been expended through September 30, with $11.2 million expected for the remainder of the year. Future capital needs for 2011-2012 are projected at approximately $45 million.
• Liquidity: The company maintains $58.0 million in lines of credit. Operating cash flows funded approximately 70.8% of utility plant expenditures for the nine-month period.
• Risks and Contingencies:
  • Economic Conditions: Depressed housing markets may delay the recovery of Preliminary Survey & Investigation costs. A planned North Carolina facility project was suspended due to economic conditions.
  • Regulatory: Future earnings depend on timely rate relief to recover increased costs of operations, chemicals, fuel, and capital investment.
  • Guarantees: The company is no longer a guarantor of the Perth Amboy Series C Serial Bonds following a refinancing by the municipality.

Key Facts for Investor Verification

• Rate Increase Impact: Verify the sustained impact of the 13.57% base rate increase approved in March 2010 on future revenue stability.
• Debt Refinancing: Confirm the execution of the expected $4.0 million first mortgage bond issuance through the New Jersey SRF program, anticipated for December 2010.
• Capital Expenditure Funding: Monitor the company's ability to fund the remaining $11.2 million of 2010 capital projects and the projected $45 million for 2011-2012 without excessive reliance on short-term borrowing.
• Customer Demand Trends: Assess whether the increase in commercial and industrial water usage observed in Q3 2010 is a temporary weather-related spike or a sustained recovery from the economic downturn.
• Dividend Policy: Note the cash dividend paid per common share was $0.1800 for the quarter and $0.5400 for the nine-month period.