Business Context and Reporting Period
Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2006
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. The company also operates non-regulated contract services for municipal and private systems. As of January 1, 2006, the Bayview Water Company subsidiary was merged into Middlesex.
Key Financial Metrics
| Metric | Q1 2006 | Q1 2005 |
|---|---|---|
| Operating Revenues | $18,230,146 | $16,742,903 |
| Operating Income | $3,973,185 | $3,171,040 |
| Net Income | $1,812,364 | $1,379,702 |
| Earnings Per Share (Basic) | $0.15 | $0.12 |
| Cash Flow from Operations | $4,670,682 | $2,967,244 |
| Total Assets | $327,771,948 | $324,383,124 |
| Long-term Debt | $127,765,749 | $128,174,944 |
| Cash and Cash Equivalents | $3,298,887 | $2,983,762 |
Dividends: Cash dividends paid per common share were $0.1700 for Q1 2006 compared to $0.1675 for Q1 2005.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased by $1.49 million (8.9%) year-over-year. This was driven by a $1.0 million increase in New Jersey water sales due to base rate increases and a $0.3 million increase in Delaware revenues from customer growth and base rate adjustments.
- Profitability: Net income rose 31.3% to $1.81 million. Operating income increased by $802,145 (25.3%).
- Expenses: Total operating expenses increased by $685,098 (5.0%). Increases in operations and maintenance expenses ($0.4 million) and depreciation ($0.12 million) were partially offset by stable other taxes.
- Cash Flow: Net cash provided by operating activities increased by $1.7 million to $4.67 million, primarily due to the timing of customer collections and tax payments.
- Capital Expenditures: Utility plant expenditures totaled $4.55 million for the quarter, compared to $4.19 million in the prior year.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Program: The company expects to spend approximately $44.5 million on construction in 2006. Long-term projections for 2007-2008 estimate capital expenditures of $112.2 million.
- Financing: The company plans to fund capital needs through internally generated funds, existing lines of credit ($40.0 million available, $7.2 million outstanding), and low-cost State Revolving Fund (SRF) loans. A public offering of common stock is expected in late 2006 or early 2007.
- Rate Matters:
- Tidewater (Delaware): Filed for a $5.5 million (38.6%) base rate increase on April 28, 2006, and requested a 15% interim rate increase.
- Pinelands (New Jersey): Received approval for base rate increases of 7.02% and 0.98% effective April 13, 2006.
- Southern Shores: Implemented a 3% annual rate increase on January 1, 2006.
Risks and Contingencies
- Regulatory Risk: Future earnings depend on the approval of rate increase requests by the Delaware Public Service Commission and New Jersey Board of Public Utilities.
- Legal Proceedings:
- Perth Amboy Guarantee: Middlesex guarantees approximately $23.9 million of Series C Serial Bonds issued by the City of Perth Amboy. The company believes reimbursement provisions and taxing powers make performance under the guarantee unlikely.
- Fire Protection Appeal: Tidewater is appealing a Delaware Office of State Fire Marshal Notice of Violation. An unfavorable outcome could require capital investments of $0.9 million to $1.6 million for one system, with potential material costs for over 60 other systems.
- Arbitration: A settled lawsuit involves binding arbitration with a maximum exposure of $0.3 million, for which a liability has been accrued.
- Weather Dependence: Revenues are highly dependent on weather conditions affecting water consumption.
Investor Verification Checklist
- Verify the outcome of the Tidewater (Delaware) 38.6% base rate increase request filed in April 2006.
- Monitor the status of the Delaware Fire Marshal appeal regarding fire protection system requirements and potential capital costs.
- Confirm the timing and pricing of the anticipated public offering of common stock in late 2006 or early 2007.
- Track the execution of the $44.5 million 2006 capital program, specifically the $20.2 million allocated to Delaware water systems.
- Review the impact of the Bayview Water Company merger on future rate structures and customer base integration.