MSEX

Business Context and Reporting Period

Company: Middlesex Water Company (Middlesex)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three and nine months ended September 30, 2009

Business Overview: Middlesex operates regulated water and wastewater utilities in New Jersey and Delaware, alongside non-regulated contract services. The company serves approximately 59,800 retail customers in New Jersey and 33,000 in Delaware. Operations are subject to regulation by the New Jersey Board of Public Utilities (BPU) and the Delaware Public Service Commission (PSC).

Key Financial Metrics

Margins (9 Months 2009): Operating margin was approximately 22.9% ($15,873 / $69,164). Net income margin was approximately 11.9% ($8,234 / $69,164).

Material Changes vs. Prior Period

• Revenue: Operating revenues decreased slightly by $0.2 million (less than 1%) for the three months and $0.4 million (less than 1%) for the nine months compared to 2008. This was driven by lower water consumption in the Middlesex system due to economic conditions and cool, wet weather, partially offset by rate increases in the Tidewater (Delaware) system.
• Expenses: Operating expenses increased by $0.7 million (5.7%) for the quarter and $2.8 million (7.7%) for the nine months. Increases were attributed to higher labor costs, retirement benefit plan expenses, and higher chemical/residual disposal costs due to water quality issues.
• Profitability: Net income declined $0.7 million (14.8%) for the quarter and $2.1 million (19.9%) for the nine months. Diluted EPS fell from $0.35 to $0.29 (quarter) and $0.75 to $0.60 (nine months).
• Debt Structure: The company retired $17.8 million of long-term debt and issued $12.0 million in new long-term debt during the nine-month period. Short-term borrowings increased significantly to fund capital expenditures, with outstanding balances at $43.8 million as of September 30, 2009.

Guidance, Outlook, and Risks

• Rate Matters:
  • Tidewater (Delaware): The PSC approved a 14.95% base rate increase on September 9, 2009, expected to generate $3.0 million in additional annual revenue.
  • Middlesex (New Jersey): Implemented a Purchased Water Adjustment Clause (PWAC) on July 1, 2009, to recover $1.0 million in increased costs. Filed a petition on August 17, 2009, seeking a 26.03% base rate increase ($15.1 million). A decision is not expected until Q2 2010.
• Capital Expenditures: The 2009 capital program is estimated at $19.3 million. Through September 30, $15.9 million was expended. The company projects spending between $53.6 million and $66.2 million on capital projects in 2010 and 2011 combined.
• Liquidity: The company has $53.0 million in available lines of credit, with $43.8 million outstanding. Cash flows from operations funded approximately 64% of utility plant expenditures for the nine-month period.
• Risks:
  • Economic Conditions: Declining water demand from industrial and commercial customers in New Jersey due to reduced production output.
  • Regulatory Uncertainty: No assurance that the BPU will approve the requested rate increase for Middlesex.
  • Weather: Unseasonably cool and wet weather patterns negatively impacted water consumption volumes.

Investor Verification Checklist

• Rate Case Outcome: Monitor the New Jersey BPU decision on the 26.03% rate increase petition filed in August 2009, expected in Q2 2010.
• Consumption Trends: Verify if water usage by industrial and commercial customers in the Middlesex system stabilizes or continues to decline.
• Debt Servicing: Review the impact of increased short-term borrowings ($43.8 million) on interest expense, noting the weighted average rate of 1.77% for the nine months ended Sep 30, 2009.
• Capital Program Execution: Confirm the company's ability to fund the projected $53.6M–$66.2M capital program for 2010–2011 without excessive reliance on short-term credit.
• Cost Inflation: Track ongoing increases in chemical costs and residuals disposal fees, which rose despite lower production volumes.