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, 2006
Business Overview: Middlesex operates regulated water and wastewater utilities in New Jersey and Delaware, alongside non-regulated contract services. The company serves approximately 59,125 retail customers in New Jersey and 29,700 in Delaware. The Regulated segment accounted for 89% of total revenues and 94% of net income for the nine months ended September 30, 2006.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30) | 2006 | 2005 |
|---|---|---|
| Operating Revenues | $61,899,176 | $56,006,102 |
| Operating Income | $16,980,680 | $13,443,021 |
| Net Income | $8,157,195 | $6,350,258 |
| Earnings Per Share (Basic) | $0.69 | $0.54 |
| Earnings Per Share (Diluted) | $0.68 | $0.54 |
| Cash Flow from Operations | $11,473,141 | $6,953,600 |
| Capital Expenditures | $20,700,359 | $17,684,593 |
| Total Assets | $347,107,334 | $324,383,124 |
| Long-term Debt | $126,337,662 | $128,174,944 |
| Short-term Borrowings | $18,200,000 | $4,000,000 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 10.5% ($5.9 million) for the nine months ended September 30, 2006. This was driven by base rate increases in New Jersey and Delaware ($3.9 million), customer growth primarily in Delaware ($0.8 million), and new unregulated wastewater contracts ($0.4 million).
- Profitability: Net income increased 28.5% ($1.8 million). Operating income rose 26.3% due to revenue growth outpacing expense increases.
- Expenses: Operating expenses increased 4.4% ($1.4 million). Increases were attributed to higher electricity and chemical costs, growth in Delaware systems, and increased business insurance. Depreciation expense rose 9.6% due to a higher level of utility plant in service.
- Interest Costs: Interest expense increased $0.6 million, primarily due to higher levels of short-term borrowings at elevated interest rates.
- Liquidity: Cash and cash equivalents decreased from $2.98 million to $1.41 million. Net cash provided by operating activities increased significantly to $11.5 million, funding 55% of utility plant expenditures.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Program: The company expects to spend approximately $29.3 million on construction in 2006. Long-term capital needs are estimated between $79 million and $102 million through 2008.
- Financing: The company plans to fund capital expenditures using internally generated funds, State Revolving Fund (SRF) loans, and a planned common stock offering (1,495,000 shares) registered on Form S-3 in October 2006. Proceeds from the stock offering are intended to repay short-term borrowings.
- Rate Matters:
- Delaware (Tidewater): Filed for a $5.5 million (38.6%) base rate increase in April 2006. A 15% interim rate increase ($1.6 million annualized) took effect June 27, 2006. Evidentiary hearings are scheduled for November 2006.
- New Jersey (Pinelands): Received approval for base rate increases of 7.02% and 0.98% effective April 13, 2006.
Risks and Contingencies
- Regulatory Risk: Future earnings depend on timely rate relief. The outcome of the Delaware PSC rate case is uncertain.
- Legal Proceedings: Tidewater is appealing a Delaware Fire Marshal decision regarding fire protection requirements for one system. Approximately 67 other systems may be subject to similar interpretations. If the appeal fails, corrective costs could be significant, though the company intends to seek rate recovery.
- Guarantees: Middlesex guarantees approximately $23.4 million of Series C Serial Bonds issued by the City of Perth Amboy. Reimbursement is expected from the city, which has ad valorem taxing powers.
- Weather Dependence: Revenues are highly dependent on weather conditions affecting water consumption.
Investor Verification Checklist
- Rate Case Outcome: Monitor the Delaware Public Service Commission's decision on Tidewater's $5.5 million base rate increase request.
- Fire Protection Litigation: Track the status of the appeal regarding Delaware fire protection requirements and potential costs for 67+ systems.
- Equity Offering: Confirm the effectiveness of the Form S-3 registration statement and the timing of the common stock offering to refinance short-term debt.
- Short-Term Debt Levels: Verify the reduction of the $18.2 million in short-term borrowings as planned via the equity offering.
- Capital Expenditure Execution: Assess progress on the $29.3 million 2006 capital program, particularly the $16.0 million allocated to Delaware water systems.