MSEX

Business Context and Reporting Period

Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 and private systems.

Key Financial Metrics

Note: Balance sheet figures represent the position as of June 30, 2010, compared to December 31, 2009.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 15% for the three months and 10% for the six months ended June 30, 2010, compared to the prior year. This was driven by a 13.57% base water rate increase approved in March 2010 for the Middlesex system and higher demand in the Tidewater system.
• Profitability: Net income increased 55% for the quarter and 42% for the six-month period. Operating income margins improved due to rate relief offsetting increased operating costs.
• Capital Structure: In June 2010, the company issued 1.9 million shares of common stock, raising approximately $27.8 million. Proceeds were used to repay short-term debt, reducing outstanding notes payable from $42.85 million (Dec 2009) to $13.5 million (June 2010).
• Capital Expenditures: Utility plant expenditures for the six months ended June 30, 2010, totaled $15.98 million, compared to $11.94 million in the prior year period.

Guidance, Outlook, and Risks

• Outlook: Management expects revenues to increase in 2010 due to the full-year effect of Tidewater rate increases, the Distribution System Improvement Charge (DSIC), and the Middlesex rate increase. However, ongoing economic conditions continue to negatively impact water consumption, particularly among commercial and industrial customers.
• Capital Program: The company projects total capital expenditures of approximately $33.2 million for 2010. Future funding will rely on internally generated funds, State Revolving Fund (SRF) loans, and short-term borrowings.
• Regulatory Matters: A March 2010 rate order granted Middlesex a return on equity of 10.30% on a rate base of $180.3 million. Tidewater's DSIC was reduced to 1.07% effective July 1, 2010.
• Risks: Key risks include the ability to control operating expenses, the availability of adequate water supplies, regulatory actions on rate requests, and the impact of economic conditions on housing starts and customer demand. The company also faces contingent liabilities related to a guarantee of debt service for the City of Perth Amboy (approx. $19.7 million outstanding).
• Unusual Items: The company implemented a new enterprise resource planning (ERP) system in 2010, resulting in increased licensing and service costs. Additionally, the company elected to seek recovery of a $0.7 million investment in a North Carolina project due to suspended construction activities.

Investor Verification Checklist

• Rate Recovery: Verify the sustainability of the 13.57% rate increase granted in March 2010 and its impact on future cash flows.
• Debt Reduction: Confirm the utilization of the $27.8 million equity proceeds to reduce short-term debt and the resulting impact on interest expense.
• Customer Demand: Monitor trends in commercial and industrial water consumption, which remain below historical averages due to economic conditions.
• Capital Expenditures: Track the $33.2 million 2010 capital program against actual spending and funding sources (SRF loans vs. short-term debt).
• Contingent Liabilities: Review the status of the $19.7 million guarantee for Perth Amboy Series C Serial Bonds and any potential reimbursement requirements.