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, 2007
Business Overview: Middlesex operates regulated water and wastewater utilities in New Jersey and Delaware, alongside non-regulated contract services. The company serves approximately 59,300 retail customers in New Jersey and 31,000 in Delaware. Operations are divided into Regulated and Non-Regulated segments, with the Regulated segment contributing 90% of total revenues and 95% of net income for the nine months ended September 30, 2007.
Key Financial Metrics
| Metric (in thousands, except per share) | 3 Months Ended Sep 30, 2007 | 3 Months Ended Sep 30, 2006 | 9 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2006 |
|---|---|---|---|---|
| Operating Revenues | $24,135 | $22,632 | $64,868 | $61,899 |
| Operating Income | $7,729 | $6,859 | $17,730 | $16,981 |
| Net Income | $4,158 | $3,377 | $9,242 | $8,157 |
| Earnings Applicable to Common Stock | $4,096 | $3,315 | $9,056 | $7,971 |
| Diluted EPS | $0.31 | $0.28 | $0.68 | $0.68 |
| Cash Flow from Operations | N/A | N/A | $12,146 | $11,550 |
| Capital Expenditures | $6,805 | $8,913 | $15,579 | $20,932 |
| Long-term Debt | $128,446 | N/A | $128,446 | $130,706 |
| Cash and Cash Equivalents | $2,666 | N/A | $2,666 | $5,826 |
Note: Operating margins for the nine months ended September 30, 2007, were approximately 27.3% ($17.7M / $64.9M). Interest expense decreased to $4.8M for the nine-month period compared to $5.2M in the prior year.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 6.6% ($1.5M) for the quarter and 4.8% ($3.0M) for the nine-month period. Growth was driven by dry weather, customer growth, and rate relief in Delaware (a 12% increase implemented in February 2007).
- Profitability: Net income increased 23.5% for the quarter and 13.4% for the nine-month period. However, Diluted EPS remained flat at $0.68 for the nine-month period due to a higher number of shares outstanding following a November 2006 stock offering.
- Expenses: Operating expenses increased 5.4% year-over-year for the nine-month period, primarily due to higher labor costs, increased water production costs (electricity and chemicals), and higher repair costs for water main breaks in New Jersey.
- Capital Spending: Capital expenditures decreased significantly to $15.6M for the nine months ended September 30, 2007, compared to $20.9M in the prior year, attributed to a slowdown in new residential and commercial development in Delaware.
- Liquidity: Cash and cash equivalents decreased from $5.8M at year-end 2006 to $2.7M at September 30, 2007, despite strong operating cash flows, due to capital expenditures and dividend payments.
Guidance, Outlook, and Risks
- Rate Increases: Effective October 26, 2007, the New Jersey Board of Public Utilities (BPU) approved a 9.1% ($5.0M) interim base rate increase for Middlesex, subject to refund until made permanent (expected November 8, 2007). This was lower than the originally requested 16.5% increase.
- Capital Program: The 2007 capital spending program is estimated at $20.3M, a reduction from previous estimates due to slowed development in Delaware. The company projects capital needs of $63M to $87M for 2008 and 2009 combined.
- Regulatory Risks: Tidewater settled a Delaware Fire Marshal violation regarding fire protection requirements. The settlement requires $12.0M to $14.0M in capital investments over ten years. The company intends to seek rate increases to recover these costs, but regulatory approval is not guaranteed.
- Market Risks: Revenue growth is heavily dependent on housing starts in Delaware and weather conditions affecting water consumption. A slowdown in the housing market or adverse weather could negatively impact results.
- Dividends: Cash dividends paid per common share were $0.5175 for the nine months ended September 30, 2007, compared to $0.5100 in the prior year.
Key Facts for Investor Verification
- Rate Case Outcome: Verify the permanent approval of the 9.1% New Jersey rate increase and its impact on future revenue streams.
- Delaware Growth: Monitor housing starts and customer growth rates in Delaware, as this is a primary driver of organic revenue growth.
- Fire Protection Costs: Track the regulatory approval process for recovering the $12M-$14M capital investment required for Delaware fire protection upgrades.
- Capital Expenditure Funding: Confirm the company's ability to fund the projected $63M-$87M capital program for 2008-2009 using State Revolving Fund (SRF) loans and internal cash flows.
- Share Count Impact: Note that while net income grew, EPS growth was muted due to the increased share count from the 2006 offering; verify future dilution risks from the Dividend Reinvestment Plan (DRP).