Business Context and Reporting Period
Company: Middlesex Water Company (Middlesex)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Middlesex operates regulated water and wastewater utilities in New Jersey and Delaware, alongside non-regulated contract services. The company serves approximately 59,600 retail customers in New Jersey and 32,100 in Delaware. It is an accelerated filer and not a shell company.
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended Sep 30, 2008 |
Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Operating Revenues | $25,653 | $69,543 |
| Operating Income | $8,384 | $19,555 |
| Net Income | $4,715 | $10,284 |
| Earnings Per Share (Basic) | $0.35 | $0.76 |
| Operating Cash Flow | N/A | $13,092 |
| Capital Expenditures | $7,029 | $20,568 |
| Long-term Debt | $115,009 | $115,009 |
| Short-term Borrowings | $22,200 | $22,200 |
| Cash and Equivalents | $3,143 | $3,143 |
Note: Operating margins for the nine months ended September 30, 2008, were approximately 28.1% ($19,555 / $69,543).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 6.3% ($1.5 million) for the quarter and 7.2% ($4.7 million) for the nine months compared to 2007. This was driven primarily by a 9.1% base rate increase in the Middlesex system (effective Oct 2007) and Distribution System Improvement Charge (DSIC) increases in Delaware.
- Profitability: Net income rose 13.4% for the quarter and 11.3% for the nine months. Basic EPS increased to $0.35 (quarter) and $0.76 (nine months).
- Expense Increases: Operating expenses increased due to higher water production costs (power, chemicals), labor/benefits (including $0.5 million related to life insurance cash surrender value fluctuations), and depreciation.
- Debt Structure: Long-term debt decreased by $15.0 million due to the reclassification of Series U bonds (maturing Feb 2009) to the current portion. Short-term borrowings increased significantly to $22.2 million to fund capital expenditures.
- Capital Spending: Capital expenditures for the nine months totaled $20.6 million. The full-year 2008 estimate was revised down to $28.5 million due to slowing development in Delaware.
Outlook, Risks, and Management Commentary
- Rate Matters: Pinelands Water and Wastewater filed for base rate increases of 19.8% and 22.9% respectively in April 2008; approval is pending. Tidewater received DSIC increases effective Jan 1 and July 1, 2008.
- Capital Program: The company expects to spend $7.9 million for the remainder of 2008. Future capital needs for 2009-2010 are projected between $61.6 million and $79.5 million. A proposed $26.2 million transmission pipeline was deemed not prudent at this time by regulators, though easement procurement will continue.
- Liquidity: The company has $36.0 million in lines of credit, with $22.2 million utilized as of September 30, 2008. It intends to refinance the $15.0 million Series U bond maturing in February 2009.
- Risks: Key risks include weather impacts on water consumption, the availability of water supplies, regulatory approval of rate increases, and the slowdown in the Delaware housing market affecting customer growth.
- Controls: Management restated the Q1 2008 balance sheet to correct the classification of debt maturing within one year. New controls were implemented to prevent recurrence.
Investor Verification Checklist
- Rate Case Outcomes: Monitor the New Jersey Board of Public Utilities' decision on the Pinelands rate increase requests filed in April 2008.
- Debt Refinancing: Verify the terms and timing of the refinancing for the $15.0 million Series U bond maturing in February 2009.
- Capital Expenditure Execution: Track actual spending against the revised $28.5 million 2008 capex budget, particularly regarding the Delaware infrastructure slowdown.
- Short-Term Borrowing Levels: Monitor the $22.2 million outstanding short-term debt and its impact on interest expense given the weighted average rate of 3.73%.
- Regulatory Settlements: Review the implications of the BPU settlement regarding the proposed transmission pipeline on future capital planning and prudence reviews.