Business Context and Reporting Period
Company: Middlesex Water Company (MSEX)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Overview: Middlesex Water Company operates regulated water and wastewater utility systems in New Jersey, Delaware, and Pennsylvania. The company also provides contract operations for municipal and private clients. Key operating segments include the Middlesex System (NJ), Tidewater System (DE), and various contract operations (USA-PA, White Marsh). The company serves approximately 93,000 retail customers across its systems.
Key Financial Metrics
| Metric (in thousands) | 2009 | 2008 |
|---|---|---|
| Operating Revenues | $91,243 | $91,038 |
| Operating Income | $20,161 | $24,019 |
| Net Income | $9,977 | $12,208 |
| Earnings Per Share (Basic) | $0.73 | $0.90 |
| Operating Cash Flow | $18,506 | $19,404 |
| Total Assets | $458,086 | $440,000 |
| Long-term Debt | $124,910 | $118,217 |
| Short-term Debt (Notes Payable) | $42,850 | $25,877 |
Margins: Operating margin decreased to approximately 22.1% in 2009 from 26.4% in 2008. Net margin decreased to 10.9% from 13.4%.
Material Changes vs. Prior Period
- Revenue Stability: Consolidated operating revenues increased slightly by $0.2 million (0.2%) to $91.2 million. This flat growth masked significant segment variances:
- Decline: Middlesex System revenues decreased $1.6 million due to lower water consumption driven by unfavorable weather and reduced demand from commercial/industrial customers.
- Gain: Tidewater System revenues increased $1.4 million, aided by a 14.95% base rate increase approved in September 2009.
- Gain: USA-PA (Perth Amboy contract) fees increased $0.5 million due to scheduled fee increases and pass-through charges.
- Profitability Decline: Net income decreased $2.2 million (18%) to $10.0 million. Operating income dropped $3.9 million primarily due to the revenue decline in the Middlesex System and increased operating expenses.
- Expense Increases: Operations and maintenance expenses rose $3.4 million. Key drivers included:
- Labor costs (+$0.9 million) due to wage increases and overtime for system maintenance.
- Chemical and residuals disposal costs (+$0.8 million) due to higher unit costs and lower water quality from high rainfall.
- Purchased water costs (+$0.5 million) due to supplier rate increases.
- Uncollectible accounts (+$0.4 million) reflecting economic conditions.
- Debt Structure: Short-term borrowings increased significantly to $42.9 million (from $25.9 million) to fund capital expenditures, while long-term debt increased modestly to $124.9 million.
Guidance, Outlook, and Risks
- Rate Cases:
- New Jersey (Middlesex): Filed an application in August 2009 seeking a 26.03% base rate increase ($15.1 million) to recover costs and capital investments. A decision is expected in Q2 2010. Approval is not guaranteed.
- Delaware (Tidewater): Received approval for a 14.95% base rate increase in September 2009, expected to generate $3.0 million in additional annual revenue. Also approved a Distribution System Improvement Charge (DSIC) increase to 1.11% effective Jan 1, 2010.
- Capital Expenditures: The company plans to spend approximately $89.1 million on capital projects through 2012. For 2010, estimated expenditures are $34.3 million. Funding sources include internal cash flow, a planned follow-on common stock offering (up to 2.0 million shares), and debt.
- Economic Risks: Ongoing economic conditions continue to negatively impact water consumption, particularly among commercial and industrial customers in New Jersey. There is uncertainty regarding when demand will return to previous levels.
- Construction Market: Slowed residential construction in Delaware and other markets may delay the recovery of Preliminary Survey & Investigation (PS&I) costs. A North Carolina project was suspended due to the depressed housing market.
- Guarantees: The company guarantees approximately $19.7 million of Series C Serial Bonds for the City of Perth Amboy. While reimbursement provisions exist, a default by the city would require Middlesex to fund debt service.
Investor Verification Checklist
- Rate Case Outcome: Monitor the New Jersey Board of Public Utilities (NJBPU) decision on the Middlesex System's 26% rate increase request, expected in Q2 2010.
- Commercial Demand: Verify trends in commercial and industrial water usage in the Middlesex System to assess if the revenue decline is temporary or structural.
- Debt Refinancing: Confirm the execution of the planned common stock offering (up to 2.0 million shares) intended to retire short-term debt and reduce interest costs.
- Capital Program Execution: Track actual capital expenditures against the $34.3 million 2010 budget, particularly regarding the "RENEW" program for main cleaning.
- Perth Amboy Guarantee: Review the financial health of the City of Perth Amboy to assess the risk of the $19.7 million bond guarantee.