MSEX

Business Context and Reporting Period

Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
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 August 1, 2007, there were 13,203,379 shares of common stock outstanding.

Key Financial Metrics

(All figures in thousands, except per share data)

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 3.4% ($0.7 million) for the three months and 3.7% ($1.5 million) for the six months ended June 30, 2007, compared to 2006. Growth was driven by rate relief in Delaware (a 15% interim increase in June 2006 and a 12% final increase in February 2007) and customer growth.
• Expenses: Operating expenses increased due to higher labor costs (wage increases and headcount growth in Delaware) and higher water production costs (electricity, chemicals, and purchased water). Depreciation expense rose 9.5% quarter-over-quarter due to increased utility plant in service.
• Net Income: Net income increased 11.7% for the quarter and 6.4% for the six-month period. However, Basic EPS remained flat for the quarter ($0.25) and declined for the six-month period ($0.38 vs. $0.40) due to a higher number of shares outstanding following a November 2006 stock offering.
• Capital Spending: Capital expenditures decreased significantly year-over-year ($8.77 million vs. $12.02 million for the six months), attributed to a slowdown in new residential and commercial development in Delaware.

Guidance, Outlook, and Risks

• Rate Matters: Middlesex filed for an $8.9 million (16.5%) base rate increase with the New Jersey Board of Public Utilities (BPU) in April 2007 to recover increased costs and capital investments. A decision is not expected until Q1 2008. Southern Shores implemented a 3% rate increase on January 1, 2007.
• Capital Program: The 2007 capital spending estimate was revised down to $32.1 million (from a previous $54.6 million estimate) due to slowed development in Delaware. The company projects $70 million to $100 million in capital projects for 2008 and 2009 combined.
• Liquidity: The company funded all utility plant expenditures internally during the first half of 2007. It maintains $40.0 million in lines of credit, with only $0.8 million outstanding as of June 30, 2007.
• Risks and Contingencies:
  • Delaware Fire Protection Litigation: Pending appeal regarding fire protection requirements for community water systems. If the appeal fails, the company may face significant corrective action costs, though it intends to seek rate increases to recover these costs.
  • Guarantees: Middlesex guarantees approximately $23.4 million of Series C Serial Bonds issued by the City of Perth Amboy.
  • Weather and Growth: Revenues are sensitive to weather conditions affecting water consumption and the pace of housing starts in Delaware.

Investor Verification Checklist

• Rate Case Outcome: Monitor the BPU decision on the $8.9 million rate increase request expected in Q1 2008.
• Delaware Development: Verify the impact of the housing market slowdown in Delaware on future customer growth and capital expenditure plans.
• Fire Protection Litigation: Track the status of the Delaware State Fire Marshal appeal and potential costs associated with compliance for ~67 systems.
• EPS Dilution: Assess the impact of the increased share count (13.2 million shares) on future earnings per share relative to net income growth.
• Capital Funding: Confirm the company's ability to fund the projected $70-$100 million capital program for 2008-2009 using SRF loans and internal cash flows.